Saturday, June 23, 2007

More on 'overheating' of Indian economy

Raj had asked in his comment on my earlier post what the basis for my optimism about the Indian economy was. Well, there are at least three elements that I (and others) have highlighted:

  • The rise in the savings rate from 23% in 2002 to over 32.4% in 2005-06. The investment rate has risen as a result to 33.8%. The increase in higher investment rate translates into an increment in the growth rate.
  • The turnaround in the manufacturing sector and its improved competitiveness, as a result of which we are seeing rapid growth in manufacturing and not just in services
  • Improved export competitiveness which has given us export growth of 20%.
Looking ahead, we can expect savings and investment to rise further. As income levels rise, so do household savings; corporate profitability translates into better corporate savings; better management of public finances improves government savings. Domestic savings will be complemented by foreign inflows in the form of FDI and FII.

You must also factor in higher productivity growth. Increased investment in infrastructure, telecom and IT will also mean higher productivity growth. So will the spread of education. The upside to the Indian growth story is enormous.

But the fact that we are moving towards a distinctly higher growth trajectory- say, around 8.5-9%- does not mean that the economy will not show occasional signs of overheating. In his column in today's BS, Surjit Bhalla dismisses most signs of overheating- the trade deficit, the inflation rate , a boom in credit. He points out that there is no one to one correlation between trade deficit and overheating- the US has a huge trade deficit and a low inflation rate. The average rate inflation rate in 2006, he says, was the same as in 2005- 4.7%. As for the boom in credit, that is only a facet of monetary deepening.

Bhalla then makes the point I made above, namely, that an increase in the investment rate adds to the growth rate- his estimate is of 2.8% being added to the previous trend rate of 5.6%, giving us a minimum growth of 8.4%. Add productivity growth of 1% and you have a growth rate of 9.4%.

Fair enough, but this computation ignores one element. Investment tends to generate output with a lag. The increase in demand takes place first; the increase in output comes later. As a result, we can still have inflationary pressures while we are on our way to a growth rate of 9%. Chairman of the PM's Council of economic advisors, C Rangarajan, makes this point in an interview to BS.

Incidentally, Rangarajan is upbeat about the growth outlook for the current year. He says it won't be less than 8.5% and, more likely, will be 9%. I am happy that, in my own optimism about the growth outlook, I am in exalted company.


Harman said...


I happened to stumble upon your blog from Desipundit.
In some of your previous posts (UTI bank and Reform of IIMs), you make a case for a dominant shareholder. The assumption being such a shareholder will excecise effective control through the bOard. However, the experience at a 100% Govt. owned PSU bank doesn't seems to be in line with your optimism about Govt being a majority shareholder.

Business standard has an article ( )
on the Board War that is going on in Punjab and Sind Bank.
PSB, after many years in the red turned around in 2005-06. With its tough stance on NPA recoveries (the bank had gross NPAs of 17.17 per cent in 2005, the highest in the banking industry, which has come down to 2.43 per cent as of March 2007), the bank has recovered Rs 550 crore in the last two years. This has mainly contributed to a record net profit of Rs 108 crore in 2005-06 and Rs 219 crore in 2006-07 compared with the Rs 71 crore loss in 2004-05.

( )
The Indian express reported in May, 2007 that
“Out of 37 positions for independent directors in PSU banks, 33 are occupied by members/office bearers of the Congress party”. The case of Punjab and Sind Bank is even more interesting. The following are the four “independent” directors:

o Harcharan Singh Josh - A student union leader who at present is, member of the National Commission for Minorities. Was earlier Secretary of the Minority Department of the AICC. Was also in charge of Manmohan Singh’s election in 1999
o Umesh Kumar Sharma - Former General Secretary of the Haryana Pradesh Youth Congress and general Secretary of the District Congress Committee in Sonepat.
o K K Sharma - Former AICC Secretary, attached to Congress Working Committee member Mukul Wasnik. Is also an AICC member.
o Kamal Mann - A Mahila Congress leader from Haryana is also a member of the AICC. A relative of former Haryana Minister, Tejinder Pal Mann.

These people have no qualification or experience needed to run a bank. There are serious charges against some of these directors. P&S Bank chairman in a letter to Secretary (Banking) Vinod Rao on March 30 said:

o That one of the directors, Harcharan Singh Josh, “along with other non official directors has been continuously putting pressure on the bank to agree for unreasonable settlements of non performing accounts. Since the management was not agreeing to their requests, they have been resorting to opposing all the agenda items (during Board meetings)...”

o Another independent director, K K Sharma, the chairman complained, “has not submitted ‘Deed of Covenant’ declaration of secrecy and other mandatory information despite repeated telephone calls, letters and contacts by local branch officials”.

o In the case of another director, Umesh Kumar Sharma, the complaint is also serious. The Chairman has written that he “gave an incorrect statement that he is a graduate, whereas he is only a matriculate... Harcharan Singh Josh is a member of the Minority Commission and is drawing salary as a full fledged public servant. He has been a defaulter of the bank and his accounts were settled after giving concessions.”

Also, the article continues -
Interestingly, last year when the Finance Ministry learnt that Umesh Kumar Sharma was only a matriculate, the Department of Banking initiated a move to replace him. On February 23, 2006, Amitabh Verma, DB Joint Secretary, wrote a letter to Alok Kumar, Director (ACC), stating that the matter has been discussed with Finance Minister P Chidambaram and that “he has desired that we need not seek relaxation of any of the eligibility conditions.”

In other words, “kindly resubmit the case to the Appointments Committee of the Cabinet to remove Umesh Kumar Sharma from the Board of Punjab and Sind Bank.”

Despite this, his file was again sent to the ACC for relaxation of guidelines for his ineligible educational qualifications. The approval from the ACC for the continuation of the NOD came a few weeks ago.

Harman said...

These are the two articles:

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